Helping Canadians with Personal Finance Since 2006

How Come I’m Not Rich?

Editors Note: This article was originally posted in 2011, but still highly relevant.

“90% of putts that are short don’t go in.” – Yogi Berra

Why are some people able to become wealthy relatively easily, when most people struggle with their finances? In Canada, about 1 person in 50 is a millionaire and in the US about 1 person in 13 is millionaire* – which is probably a lot more than you thought. A recent BMO Harris study found that only 6% of millionaires inherited their wealth and 94% made it on their own.

In short, lots of people are wealthy and nearly all of the millionaires and billionaires made it all on their own.

From experience in talking with literally thousands of people and then seeing their complete finances, we can usually tell who is wealthy and who is not just by talking with them. We have found that the main difference between the wealthy and people that struggle financially is not their education, career, salary, type of family or anything like that. The main difference is the way they think about money.

Here is the secret: Wealthy people are focused on building wealth.

Most people struggle financially because what they believe about money makes them focus on other things.

Here are the beliefs about money that cause most people to struggle financially:

“The Sacred Cow” beliefs:

Here are 3 common beliefs that are a big part of the Canadian psyche. In our opinion, they are the main reason most people struggle financially. We put these 3 beliefs together and call them the “Sacred Cow”:

1. You should try to look like you are wealthy.

Most people are not wealthy because they don’t really want to be. They want to spend a million – not have a million. Most wealthy people are actually relatively frugal and are good savers (at least until they are wealthy). “Conspicuous consumption”, such as expensive cars, clothes, jewelry, electronics and even homes are signs of being a spender – they are not signs of wealth.

If you sense someone is trying to impress you by looking wealthy, he is almost definitely not wealthy. He is probably just a spender. Wealthy people usually downplay their wealth. It is the non-wealthy that try to impress others with money.

Years ago, when we used to go to the homes of new potential clients, we had what we called the “4-bedroom house and 2 minivans rule”. If we pulled up to a large, 2-story house with nice landscaping and 2 expensive vehicles in the driveway, we would just look at each other and shake our heads. They almost definitely have little money.

Then we would see their finances and in almost every case, they were up to their ears in debt. The house was fully mortgaged, they had credit lines that are maxed and credit card balances, and the vehicles were leased. It was shocking how often the value of the 2 vehicles in the driveway was more than their net worth!

Most millionaires live in ordinary neighbourhoods and few people know they are millionaires, as explained in the classic book, “The Millionaire Next Door”. Truly wealthy people usually downplay their wealth. They get a feeling of confidence from having money – not from spending money.

2. It is most important to pay off debt.

When we meet people with no debt, they are almost always among the poor or middle class. Wealthy people tend to have a lot more debt than non-wealthy people. Most Canadians tend to spend the bulk of their working life focused on paying off their mortgage and other debt, which we call “getting up to zero”.

Being in control of debt is obviously important, but wealthy people are focused on building their net worth – not on paying off debt. In fact, borrowing to invest in their business or in the stock market is almost always the reason they are wealthy.

Paying off debt is just “getting up to zero”, which will not make you wealthy.

You need to picture being wealthy. Imagine having a $5 million investment portfolio. You did not get there by investing in bonds. Properly invested mainly in the stock market, on average your net worth grows by $500,000/year. However, most years are not average. Quite often, your net worth grows by more than $1 million in a year.

But it also goes down several times a decade. In fact, once or twice a decade your portfolio drops by more than $1 million. In 2008, your $5 million could have dropped to between $3-3.5 million – a drop of $1.5-2 million. That’s a lot! However, you are focused on building wealth and know investing this way is what will grow your wealth in the long run.

Here’s the point: If you are scared to have a large stock market portfolio, then how will you ever build wealth?

Story of Reg and Rich

Just picture a typical Canadian named Reg. His parents taught him that “all debt is bad”, so his main focus financially during his life is paying down debt. He does not want to look poor, so he still buys a decent home, car and furniture, and travels regularly, but he always focuses on paying off his credit cards. He uses his extra cash to increase his mortgage payments.

He has some RRSPs, but he does not want to lose much money. Therefore, he invests conservatively partly in GICs and partly in balanced and income mutual funds. He focuses his investments so he can “sleep at night”.

Obviously, Reg will never become wealthy, will he? The way he thinks about money will prevent him from investing enough to ever become wealthy. He invests too conservatively to build any serious wealth.

His brother, Rich, has always wanted to be wealthy. He is constantly thinking about ways to invest more. He has a small business on the side and rents out his basement. He invests nearly all this extra money and his bonuses, mostly in addition to RRSPs. He does not spend a lot of time on his investments. He has a sensible approach and just keeps investing $30-50,000 every year. His entire portfolio is long term investments focused on growth.

He has an average home in an older neighbourhood and has lived there for more than 20 years. His family teases him about his 15-year-old Honda Civic, but he likes it.

Both Reg and Rich are in their mid-50s and appear to be doing fine financially. Reg has a newer home and much nicer car, but Rich has a calm confidence about him. The main difference is that Reg’s investments are $250,000, while Rich’s portfolio is over $5 million.

Think Like the Wealthy

The good news about this is that you can change the way you think about money. If being wealthy resulted from being lucky in how you were born, you would have no control. But since it is primarily a result of what you believe about money, it is within your control.

Here is how the wealthy think about money

Our experience is that the poor have most of their money in consumer items, such as a car. Middle class people have most of their money in their home or other real estate. Wealthy people have the bulk of their wealth in their business or in the stock market (many businesses). That is why they are wealthy.

Wealthy people are also usually prudent with their investments, but the big difference is that they save a lot and are focused on investments they expect to grow long term, instead of investments that fluctuate less short term. They tend to be confident in investments because they are optimistic about the future – not fearful and pessimistic about short term risk.

The reason they are multi-millionaires is that they have millions invested in their business or in the stock market. Wealthy people are wealthy because they are focused on building wealth. Specifically:

They are usually frugal and good savers (not big spenders).

They are focused on building their net worth (not paying off debt).

They are generally optimistic about the future (not fearful and pessimistic).

They are focused on long term wealth-building investments (not short term risk).

Learn to think like the wealthy and you can become one of them.

*Spectrum Group

“Disclaimer: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Opinions expressed are the personal opinion of Ed Rempel.”

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching. If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com. You can read his other articles here.

112 Comments

“For the rest of us, we can make our millions tagging along with the found by investing in the stock market…”, speaking of misleading…

(Search out any Dalbar report to see how those mutual fund millionaires are doing.)

The previous statement is not misleading, because what you are doing is “investing” in the winners of the public business world…yet it’s not you who is the big winner.

I’ll use Onex (OCX) as an example. From start-up to IPO the founders reaped a 50% per year ROI, the opening day stock buyer-and-holder has gained 9% per year. Big difference between 50% and 9% on the back of the same business model. Sure, that’s still 9% for doing nothing but assuming risk (if the stock holder managed to hold on for 30 full years).

It’s because the founder was the one who made the investment for actual production, the stock holder is merely deferring consumption, i.e. their “investment” is just a place holder savings. The investor is at the Center of Profit because they created it; the stock buyer is basically selecting a “bank” to put their savings.

How come you are not rich?

Probably because you are only saving for consumption instead of investing for production.

The funny part of this is that you are both mostly right within the context in which you are speaking, but also both deliberately ignoring meaningful portions of the others’ argument.

This is all a risk-reward spectrum, and you are discussing two different points on the spectrum. Low risk = low reward, and high risk = higher potential reward.

Take a GIC. Pretty low risk, darn close to zero. Pretty low reward, also arguably zero.

How about stocks? Done properly, the risk is fairly low to moderate (talking diversified investments, not junior miner stock). The reward? Also moderate, a few points over inflation at best.

Start your own business? Very significant risk – as Ed point’s out, probably a very high fraction go under resulting in complete loss of capital. The reward potential? As SST points out, IF successful, clearly more than the stock market.

So neither of you are right or wrong. If you want to get “stupid rich”, the low-to-moderate risk of the stock market probably won’t do it. So start your own business. But be prepared for the fact that you have an 80% chance of toasting yourself.

Not so.
The original argument is that I’m not rich because I don’t think like the wealthy and “wealthy people are wealthy because they are focused on building wealth.” Little to do with risk:reward. Remember what Buffett said, “Risk comes from not knowing what you’re doing.”

Repeating what the article in #99 states, as I also believe, putting money into the stock market is not “building wealth”, it is merely a form of savings/delayed consumption. The wealth has come and gone and the stock holder is almost always on the wrong end.

Real wealth is achieved through, as Ed writes, “building wealth”; actual investment, that being money put forth to create production. Thus if your money isn’t on the production side, it’s automatically on the consumption side.

I would wager the wealthy focus first on building wealth, and saving second. You will almost never become rich via savings alone, be it in a bank or a stock or variation thereof.

It’s just about multiples. Personally, I call “building wealth” any time you add to your net worth, be it small or large. And simply working, saving, and investing in the market (prudently) over time, just about anyone should be able to build a nest egg equal to high-single to low-double digit multiples of their annual salary. Someone who earns $100k should be able to grow a nest egg of $1M (10X) over 30-35yrs just by saving & investing in the market. I certainly could (and am). And with the average Canadian HH Net Worth at $232,200 (and likely 70% of that tied up in said house), I think most reasonable Canadians would say holding a $1M financial portfolio classifies one as “wealthy”, if perhaps not “filthy, stinking rich”.

Are you going to grow to a 100X or 1000X multiple of your annual salary being in the market? No chance at all. So for the record I am not at all disagreeing with you. If tens of millions, hundreds of millions, and 1000X multiples of a “normal” salary are what one considers to be the requirement for “wealth”, then yes, absolutely, the stock market isn’t going to cut it.

I’m just not sure that’s what the majority of people here realistically expect or need. (of course we all would like it)

No revelations there. Again, fully agree that if you are trying to get Buffett-rich, or even $50M-rich, it won’t happen through investing in public equity and index funds.

But here’s the catch. People need to ask themselves how much you really need? Would I *like* $100M? Sure I would. Do I *need* that much to live extremely well and be very happy? I personally don’t.

Second, should you decide you do want that $100M and need to shoot for the moon, you need to be aware of potential failure. The article discusses 2 or 3 guys, Buffett, Gates and Ellison, who obviously made it big. But out of what number that tried and failed?

In that regard, this is no difference than the LottoMax commercials. Sure, you’ll be plenty happy IF you’re successful, but what are your odds? And if you knew in advance you had the choice between a 1:1000000 shot at “ultra-rich”, or could have a virtually guaranteed $1M at retirement, would you actually choose the former?

(For the record I believe the world needs risk-takers and play-it-safe-ers. Although I am not the former, I am very thankful for them as they help us all build wealth. But I would never suggest that the former is appropriate for all or even most people.)

Gently reminder that this article is wholly concerned about being/becoming RICH, not playing it safe.

#1 — in a Capitalist society, there is no “enough” after needs are covered. If meeting needs — food, shelter, heat — is the only concern, then people need very little capital; they needn’t save or invest, CPP/OAS/welfare will provide for them.

#2 — there seems to be an unreasonable association of risk to private equity. I guess that’s true if it’s compared to buying a lottery ticket. There are indeed safe and low-volatility PE investments (e.g. I’m greatly enjoying my returns on Sask. farmland, as is Liquid over at the Freedom35 blog; almost every single pizza joint, etc.). Starting and running a successful business has the same driver as investing, you have to know what you are doing. All the non-Buffett failures most likely had huge gaps in their operations knowledge and skill. Apply the same to an investor and they will also fail.

As for that “guaranteed $1M at retirement”…I guess if you are shooting to be in that 1% club (that’s a 99% failure rate, btw) then you probably would have no emotional problems investing in PE.

Again, re-read the OP: I’m not rich because I don’t think like the wealthy and wealthy people are wealthy because they are focused on building wealth, not merely conserving purchasing power. In other words, you are not rich because i) you aren’t smart enough, and/or ii) you don’t take enough risk.

#1 “Never enough” in practice, even in a capitalist society, is almost always wrong (ask Gates or Buffett). Eventually individuals realize the limited nature of their time and associate an accordingly high price. Though different, everyone has an “enough” number. Capitalism does not equal everyone wanting ultra-riches. It equals everyone wanting as much as possible given work they are willing to put in (in other words, VALUE – return on your time & risk – which is precisely my point).

#2 I wholly disagree that starting/owning/operating any kind of business or even owning farmland in Saskatchewan is as easy, low-risk, low time involvement, and inexpensive to execute as passive investing. It’s true that not many people do either of those things right. But one of them is a heck of a lot easier to learn (more forgiving of mistakes), requires a whole lot less time commitment, is almost always more liquid, requires less capital and operating costs, is easier to get involved in, etc… the list goes on. Again, coming back to value – return measured against work and risk.

SSTon June 3, 2015 at 4:04 pm

Again, coming back the point of the OP: why we are not rich.

The author, a financial sector professional, states we are not rich because we do not think like the wealthty.

He also states that it’s his strong belief and professional guideline to have 100%+ of your money invested in stocks/mutual funds 100% of the time.

Except that wealthy people will NEVER adhere to an investment plan anywhere near the author’s 100/100 mandate.

So which is it…follow “professional” advice or adopt a wealthy mindset?

Maybe the actual reason we are not rich is because we keep buying mutual funds and stocks.

To bring the discussion back to the point of this article, I meet many people that just feel generally frustrated with their finances. They wonder why they have not accumulated much wealth.

People often ask me how other people seem to build up some wealth, so I decided to write an article about it. By “wealthy”, they mean having enough so they don’t have to worry about money and can enjoy some luxuries in their life.

What I tell them is, first, most of the people that appear to be wealthy are just spenders and not really wealthy at all. We very often see people with high lifestyles, but relatively low net worth.

Second, almost anyone can build up a large portfolio if it is important enough to them and they do the right things. Just focus on building wealth, be frugal, and invest in equities for the long term. I’ve seen many people build up portfolios of $1 million or more. Most that I have seen have done it by investing entirely or mostly in equities.

Most people don’t do these things. They spend a lot and don’t save much. They over-estimate the risk of the stock market. They focus on more conservative investments, or income-producing investments, or make common investing mistakes (like moving their investments to whatever is currently popular), or paying off debt, and consequently never build up much wealth.

$1 million is not really that much today and not really enough to retire “rich”. For example, with a 4% withdrawal, $1 million only gives you $40,000/year income, which is hardly “rich”.

Dwilly, I should point out that Warren Buffett made his millions by investing in equities, most of which were public equities on the stock market. He does, of course, have what might be considered a “private equity” outlook, meaning he thinks like an owner participating in the growth of the business (not like someone trading on the stock market).

This article is not about the super-rich. It’s about what average people can do to build up enough so they feel wealthy and don’t have to worry about money.